Political strife raises pressure on Berlusconi to resign

Pressure mounted on Italy's Prime Minister Silvio Berlusconi to resign on Thursday, with six former loyalist deputies calling for a "new political phase" in a letter to the premier as the cabinet failed to agree on urgent economic reforms.

REUTERS - Pressure mounted on Italy's besieged premier Silvio Berlusconi to quit on Thursday, as six former parliamentary loyalists called for a new government and the squabbling cabinet failed to agree an urgent economic reform programme.

The rebel deputies, three of whom have already left Berlusconi's crumbling coalition, wrote to the premier saying Italy needed a "new political phase and a new government".

"We are asking you to take an initiative which is appropriate to the situation," the deputies wrote, according to the letter published in the daily Corriere della Sera.

"Be the backer of a new political phase and a new government which would have the task, from now until the end of the legislative term, of implementing the agenda agreed with our European partners and with it, the indications which came from the European Central Bank."

Berlusconi has rejected calls to stand aside and make way for an interim government, saying the only alternative would be to hold new elections, which he says would be irresponsible while the crisis continues.

But as the number of party rebels grew, another deputy in the ruling PDL, Giuliano Cazzola, gave an interview to the online affaritaliani daily saying Berlusconi should leave and allow another centre-right government to take power.

"The government should resign and the PDL should manage a different solution without clinging to the alternative 'Us or new elections'," he said, suggesting that Berlusconi's chief of staff Gianni Letta could lead a new administration.

President Giorgio Napolitano said on Tuesday he was sounding out support for reform from political forces outside the ruling centre right, suggesting he was contemplating the possibility of a broad-based national unity government.

The head of state does not have the power to dismiss a government with a parliamentary majority but as growing numbers of PDL deputies desert Berlusconi, the opposition believe they could have the numbers to topple him as early as next week.

With doubts over Greece's future in the euro zone already causing havoc in the markets, the renewed political uncertainty in Rome racked up pressure on Italian government bonds.

Yields on 10-year BTP bonds hit more than 6.3 percent, creeping closer to the level of 7 percent which many analysts believe could lead to a so-called "buyers' strike" where investors take fright and refuse to buy the paper.

The risk premium over benchmark German Bunds rose at one point as high as 462 points, the widest spread since 1995, reflecting the growing worries about the euro zone's third largest economy.

Blocked reforms

With Greece teetering on the brink of leaving the euro, the future of the single currency could now depend on preventing a meltdown in Italy, which would overwhelm the bloc's current defence mechanisms.

Berlusconi, struggling to contain divisions in his centre-right coalition, failed to win support at a cabinet meeting late on Wednesday for the comprehensive reforms to stimulate growth and cut Italy's massive debt that he wanted to take to a G20 meeting in Cannes.

His supporters accused Economy Minister Giulio Tremonti, a constant thorn in his side, of blocking a deal.

Instead of a decree that could have been put into action immediately, the meeting merely agreed on a so-called maxi amendment, containing a number of measures to add to a budget bill currently before the Senate.

A government statement said the amendment was in line with what had been agreed with EU partners at a summit last week but contained no details.

An official said the package included tax breaks for infrastructure investment, simplifying bureaucracy and helping youth employment though apprenticeships.

"Italy can absolutely manage this situation and save itself if it does its work properly," said Corrado Passera, head of Intesa San Paolo, Italy's biggest retail bank, adding that it required a government "which acts differently from this one".

Rome's borrowing costs have been capped since August by the European Central Bank's bond-buying programme but as the crisis has spread and concerns about Italy's towering public debt have grown, its intervention has become less and less effective.

Market concern about Italy was underlined by French bank BNP Paribas , which reported on Thursday that it had slashed its sovereign exposure to Italy by 8.3 billion euros, or 40 percent.

Berlusconi is due to meet leaders including German Chancellor Angela Merkel and French President Nicolas Sarkozy at the Cannes meeting on Thursday.

He has rejected a growing chorus of calls to step aside, from groups ranging from the centre-left opposition to business and banking associations, unions, the Catholic church and now rebels in his own PDL party.